While the fallout from the commercial property crash on the portfolios of wealthy tycoons has made the headlines, the danger to the savings and pensions income of the many smaller investors enticed into the sector has been largely ignored.
The few years running up to the peak in 2007 saw an influx of money from high street savers and armchair investors, encouraged by advisers to buy into the dream of a fortune from property.
Most took pains to point to the need for a long-term investment strategy but there were few who did not play off the supposed stability of bricks and mortar, tapping in to the British love of property.
“A lot of brokers in 2005 and 2006 were putting half of client money into commercial property, one way or another,” said Mark Dampier of financial adviser Hargreaves Lansdown. “It was sold as a great diversifier for a portfolio, which has proved completely incorrect, as it has gone down alongside other asset classes. It could take a long time for confidence to return.”
Investors pumped pension schemes full of commercial premises, sometimes directly through self-invested pensions products, and funnelled savings into shares in the new-fangled real estate investment trusts and glossy brochured property funds.
There is now a real risk that the sector, having made huge strides to becoming a recognised asset class rather than just a fraction of the “alternatives” segment, will take several steps backwards.
Alex Price, chief executive of Palmer Capital Partners, which is to take control of two private investor funds out of administration, said: “A lot of private investors came into the market on the assumption of liquidity and safety. Property needs to keep its house in order to keep the faith of these.”
A meeting of investors last week approved the transfer of funds, which had been managed by Belgravia Asset Management. “The future will largely be about restoring investors’ and banks’ confidence in the funds,” he added.
Confidence needs to be addressed at a broader level, with evidence that investors are continuing to withdraw. Last week, Norwich Union’s £2.9bn pension and life property fund became the latest – and one of the largest – to stop redemptions to 250,000 investors.
The property fund management sector did not cover itself in glory last year, underperforming direct valuations. Total returns on UK-pooled property funds were down by almost a third in 2008, according to IPD, with some highly geared vehicles seeing returns down as much as two-thirds.
Property was often marketed to investors for its income from rents, which is under threat as the downturn hits occupiers. Funds, both listed and unlisted, have had to cancel dividends, exacerbating the pain from losses in share prices. Unlisted vehicles such as that run by private investment group Glanmore have stopped both redemptions and dividends – investors cannot get out and will not be paid.
Fund managers make the point that investment should be for the long term, particularly for pensions, and those that can should see the market return in the next few years after a painful hold period.
Perhaps more worrying will be the collapse of companies that managed private money in highly leveraged vehicles, such as Belgravia’s funds, as well as those such as Guestinvest that committed capital into various speculative deals.
Investors in Guestinvest, the hotel room company that collapsed last October, will next week find out how Deloitte intends to realise cash from their unbuilt hotel rooms. Deloitte has already tried – and failed – to sell the hotels. Guestinvest, alongside other funds, was suitable for self-invested personal pensions. Advisers say it is unknown how much money was invested directly into property through Sipps.
Martin Tilley of Dentons Pension Management says commercial property has been a popular investment, with about a quarter of all clients having exposure to direct property.
However, those holding property and drawing an income could be facing significant drops in pensions income owing to the revaluation of their holdings.
Some Sipp clients, he added, with a majority of their holdings in property assets, could have suffered as badly as equity-invested Sipps. A 60-year-old retiree holding solely commercial property in a Sipp may have seen income fall by up to 40 per cent in the past two years, he said.
“A lot of clients will have looked at property as a more stable and secure asset class than equities, which has not proved to be the case, and now face a loss of income.”
Ironically, there will be a time that private investors should look at the sector. Shares are trading at huge discounts and the auction rooms are seeing interest from some professional investors. But it is still only the brave that will risk money as rents fall and vacancies increase. Bricks and mortar no longer feels so safe and secure.
